'08 Will Be Tough Act to Follow in Fixed Annuities

Banking companies will be hard-pressed to repeat a banner 2008 in terms of sales of fixed annuities.

Fixed annuities were popular late last year and early this year, but with interest rates falling and the markets in a fingers-crossed recovery, executives and analysts expect demand for these products to start tapering off.

At SunTrust Banks Inc., strong fixed annuity sales last year carried over into this year, said Alex Null, the senior vice president of mutual funds and annuities at SunTrust Investment Services Inc.

"Sales are still strong, but they have slowed with what the markets have done recently," Null said in an interview last week.

Changes in interest rate spreads and a degree of restored confidence in the markets, meanwhile, mean that demand for variable annuities and mutual funds — while still below its normal level — has begun to rise in recent weeks, according to Null.

"The yields that drive fixed annuity rates are compressing, which will make it tough for insurers to offer the rates they did in 2008," he said. "And the equity and bond markets are recovering."

Variable annuity sales through banks have been in decline. Of total bank sales of annuities and mutual funds, variable annuities fell from 24% in the fourth quarter of 2007 to 13% in the first quarter of this year, according to the research firm Kehrer-Limra of Princeton, N.J., a unit of Limra International.

Demand for fixed annuities was strong enough last year to lift overall annuity sales at banks. Income generated from annuity sales at banks rose 29% last year, to $2.6 billion, according to the Michael White-American Bankers Insurance Association Annuity Fee Income Report.

Leading the pack was JPMorgan Chase & Co., whose 2008 annuity income rose 122%, to $363 million. Contributing to the increase was the company's acquisition of Washington Mutual Inc.'s banking operation, which had a robust annuity business.

SunTrust was another beneficiary of the annuity surge. Its sales rose 7.7% from a year earlier, to $123.8 million, according to the Michael White report.

The increase in fixed annuity sales has coincided with a sharp decline in the sales of both variable annuities and mutual funds, according to Kehrer-Limra.

In the first quarter fixed annuities accounted for 52% of banks' sales of annuities and mutual funds. Mutual funds accounted for 34% of the sales, and variable annuities for 13%.

In the first quarter of last year mutual funds accounted for 54%, fixed annuities 25% and variable annuities 21%.

Recent changes to the pricing and benefits associated with variable annuities have made them less appealing to investors, said Kenneth Kehrer, a director at Kehrer-Limra.

"On the other hand, the benefits might still look very attractive given what happened to mutual fund owners over the past 18 months," he said.

One winner in the rush to fixed annuities was New York Life Insurance Co. It jumped to No. 2 from No. 13 in annuity market share in the first quarter, according to Limra International.

New York Life's sales of fixed immediate annuities and related annuities increased 76% in the first quarter from a year earlier, thanks in part to a lifetime income annuity the company has been selling in banks for nearly five years.

One reason demand has been strong for that type of product, according to New York Life, is that it fits into an investment process the insurer has been presenting to advisers as a retirement income option for customers.

Single-premium immediate annuities, such as New York Life's Lifetime Income Annuity, are often used to guarantee a portion of income, said Brian Doherty, a VP of third-party distribution for the company's retirement arm.

"Post-crash, the demand has picked up, because an immediate annuity is an efficient way to generate income," he said.

For the past couple of years New York Life has sponsored retirement planning presentations by Farrell Dolan, former EVP of Fidelity Retirement Services.

Sales of New York Life's annuities have benefited from the education-oriented approach, Doherty said.

Advisers are "looking for new road to go down from a process standpoint," he said.